Newer member here, but just wanted to say thank you too. I've learned so much and I hope you'll be around for a long time helping us learn along the way.

Where

Phil,
3 for 3! Sold on initial excitement and made a double on USO, 70% on AMZN and 70% on SPY options from Friday.
Thanks and much appreciated for the suggestions.

Gingbaum

Phil, I have the SRS 2011 $7.50 short puts you recommended awhile back. I sold them for $2.20 and now $1.51 (up 31%) although SRS has been down since inception. This was a nice mellow way to play it like you said, thanks.

Jomptien

Phil, I meant to post over the weekend, but I was busy having fun . Last week was a very nice week for me, and I wanted to thank you for all that you do. I am pretty much back to cash and really feel like I am learning. I have out performed the $5kp by a very large margin. Thanks again for the service you provide.

Scotbraze

Phil/ et al- Thanks for the answers to my spread questions last night, as I really needed that little piece of knowledge to crystallize my understanding of spreads. Your help is much appreciated and I have been doing really well for the last couple of months with fewer and fewer missteps as I embrace the PSW ways and watching my portfolios grow.

Craigsa620

Phil - I am 3 month follower and shout a big thanks for all the good advice and training. I read all the materials and posts as suggested. I am retired CFO and took over my investments 2 years ago from broker after frustration with returns. I followed some conservative advice for retirees and have 60% bonds currently in a 5m portfolio. I had been doing covered calls on my stocks to boost returns and slowly am getting more aggressive after following your site and my son who has been with you for 6 months. I allocated 1.5m to stocks and am scaling up from 30%. I did some of the trades suggested in early June using Aug & Oct buy/writes on CSCO, WMT, MON, WFR, DO in addition to calls on XOM, CVX, PEP, PG, WM, T that I owned. Most are doing very well (4-24%) in 60 days. My good problem is that instead of getting longer, I will be making 6% quickly (50% plus annualized) and getting called away on many positions. What would you advise for getting long again. Thanks again for such a great job advising all of us!

TXChili

Way back did 20 of your suggested short BP Jan 11 26 P @ 4.3 now .85 — sold half. this am —
paid for a years sub AGain!! thank you very much!

Ban2

Hey I just did a nice options trade on LL for $800 (50%) gain thanks to this site, so… not bad for my first day! An hour of reading you guys and I already paid for two months subscription! Thank you!

lchu

This is my first month here. Today was a money train with futures. I gained 7500 USD with KC, RB, CL, NG.
I took RB almost every direction up and down. And I only used 1 contract or maximum 2.
Thank you. I think it was a good investment to subscribe…

Kgabor

Thank you so much for the good daily news in review Phil. I love your commentary! It is such a breath of fresh air in the smog cluttered news networks.

RJRoberts

You guys gotta give it to phil–the voice of reason yesterday, last nite and this morning.

Corleone

Phil,
thank you for the thorough response(s). I joined this group last week to take my education to the next level. the school i am involved with very good at calling out levels but very little live trading and little help in managing a position going against you.
I like the combo of knowing where the major levels are coupled with your approach to getting in. learned a lot this week.
thank you!

DawnR

Phil - I caught the interview…. terrific!. Your host recommended that the viewers should " go to your site, as you will be entertained ". That is for sure if you consider entertainment is laughing while you read, learn and make unbelievable leveraged profits that you never thought were possible. That is my kind of entertainment !

Gel1

Thanks, Phil. I really appreciate your sentiment and commitment! Just want to thank you for what you do for all of us.

JBaker

Took profit on QQQ 57 Puts, bot 40 at $0.07, sold 20 for $0.15 and 20 for $0.32. Thank, Phil

Bobhu

CZR – well that was fun! Opened the play yesterday. As the arb premium was now almost all gone from the box spread today, I just decided to close it. The rundown, after all commissions: my net was $183.51 profit for an overnight trade tying up $2000 margin in an IRA account. That's a 9% overnight return (3200% annualized!) …And all that learning, too! Thanks PSW!

Scottmi

Phil: I loaded up big time yesterday on your suggestion of the AMZN September 75 naked puts. They are up 43%!

Gel1

Phil// Cashing out of my LT holdings have been going on for over two weeks. However, I have elected not to cash all of the holdings including my AAPL, Jan 16 Short Puts at $470 and $480. Plus, I am being opportunistic in selectively putting on those positions for beat down stocks by selling 2016 Puts. That said, YTD harvested profits now stand at $135k on a current account balance of $683K or a 19.81% YTD return. Thanks for your expertise in teaching me how to be patient, be the banker, but also not being greedy, cashing out and harvesting profits.

IHS4GOD

You are doing a fantastic job. I think most of us our very well balanced and consequently have learned how to manage through these ever so short declines in the market without panic.

Dclark41

I went LEVEL 4 because of YOU! That's right, buddy!! And I started putting my options trades in my comments...also because of YOU! That's hard to do. I Love PD!! He's just a man about Work!

Chris Valley (author)

Hi Mr. Phill, I am a Venezuelan lady tormented by our politicall situation, who use to be an emerging market trader, and many other executive positins in the finance "arena" and now is trying to built a new concept and service for asset management for clients on my own, I am in the trial and learning process at the moment, I also invest for some friends and myself. I want to congratulate you , because reading you fill my days with a touch of irony (besides ,of course the spectacular market insight) that happens to give me energy, its a joy the remarks and comments even the pictures used, sometimes I just read it for the fun, I completily agree with your thouhts, though we belong to totally different cultures and enviorements and certanly realities Your readings is like a little hand helping me out to be in the market and fight for my devastated country where every single day we looe inches and yards of liberty. You shoul try to writte a book!

Mindeyes

Thanks Phil for helping make this a much, much better year this year than last. Your tutelage has been so very helpful. Don't think I can say Thanks enough. And I thanks all the members here who were work hard in helping us all to become better traders, and I would say better people as well. The support many of you offered when we evacuated during the fire this past year helped me immeasurably.
Happy New Years to you all!

I've recently done exactly what Phil described. I upgraded my ability to trade the IRA acct. by transferring acct. from TDA to TOS. TDA would not allow spreads; TOS does. Neither will allow naked options. With spreads I am able to buy calls or puts several months out then sell front month calls or puts over and over. This allows me to collect premium, which is, of course, the goal. This wasn't an original idea. Phil put me onto it. Since the transfer I've substantially increased my performance in the IRA!

Iflantheman

AMZN ... thanks Phil; boy did they run a squeeze on everyone there ... made me sweat ... scaling helped! I think AMZN has an 85 handle tomorrow ... maybe lower.

Cap

Phil - Your logic not only makes sense, but it made a lot of premium profit for me over the past 12 months. I have recovered much of the massive equity losses of last year. My Monday play is the sale of long term puts on FXI. Love the premium!

Gel1

Thank you Phil we appreciate all the work you put in to teach us valuable lessons about investing.

Pat Swap

Phil-
I would like to echo the sentiments of dclark41. Joining this site was the best thing I have ever done to aid my growth as a trader/investor. There are so many smart and experienced people here sharing their ideas that regardless what your investing style is you will learn something daily. Thank you and all the regular contributors for your generosity.

Acd54

Hey Phil - writing to thank you!
First of all, and I know you have heard this a few times form some others - the portfolio updates you have done - with entries and targets and even margin reqs are invaluable!
I find myself understanding what is done here IN THEORY most of the time..however, there is a much bigger difference in placing and setting up the hedges properly than just understanding…This has been eye opening for me and Ifeel like I just took a major step in trading during the last week.

Bcfla

Phil: well, often you say, just for FUN, great comment, TXS,
closed 2 SKF positions, one with 10 % , the other with 6 % gain,

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Phil, You were on the $ today with your calls almost exactly on the turns – Krap kuhn krup (Thai for thank you very much).

Jomptien

I have been a member of Phil's site for three years and counting, and my advice is that all investing takes time. There are o shortcuts, no secret way to riches. Same with Phil's site- you need time and patience to start benefitting fully from his advice. But it is often spot on and also very useful, especially to me as I try to keep a level head in this turbulent stock market environment.

Jordan

Phil...The hundred grand portfolio updates are helpful...Fun ..and have been profitable...really like em... made some nice entries into USB, KEY today... and I better add those FAZ calls tomorrow... Really glad you put that up this morning...

Becker

Blessings, ALL: So we have completed two months of 2015. So far it has been a good ride with my PSW all short put portfolio showing a 15.73% gain with $83K in profits harvested in 2015.

IHS4GOD

I did the same thing via your logic (sold puts that is). I glanced one time and they were already up 15% which is considered a good return for an overnight hold in most circles. This is PSW though and to us it's just another day…

Kwan

Phil - I am 3 month follower and shout a big thanks for all the good advice and training. I read all the materials and posts as suggested. I am retired CFO and took over my investments 2 years ago from broker after frustration with returns. I followed some conservative advice for retirees and have 60% bonds currently in a 5m portfolio. I had been doing covered calls on my stocks to boost returns and slowly am getting more aggressive after following your site and my son who has been with you for 6 months. I allocated 1.5m to stocks and am scaling up from 30%. I did some of the trades suggested in early June using Aug & Oct buy/writes on CSCO, WMT, MON, WFR, DO in addition to calls on XOM, CVX, PEP, PG, WM, T that I owned. Most are doing very well (4-24%) in 60 days. My good problem is that instead of getting longer, I will be making 6% quickly (50% plus annualized) and getting called away on many positions. What would you advise for getting long again. Thanks again for such a great job advising all of us!

TXChili

Phil – I wanted to tell you how much of a privilege it is to learn from your every day. You are a shining beacon in the life of so many investors. You have assembled probably the best group of people in the history of financial blogging and you, yourself have done more to help investors in the last 6 months than all previous financial advisors combined.

StJeanLuc

Phil/ I hope the next 5 year bear market will be as much fun and as profitable as this 5 year bull market. For those who survived 2008/2009, and who imbibed the wisdom of PSW, what a time it has been. Good to have you by my side. I think you are selling yourself short – you need to triple your prices :)

Winston

There are a lot of us that have been here a long time and we all learn something everyday. Just keep asking questions, there are a lot of smart people here and they are willing to help and then of course, you have Phil.

GIVE THANKS/PHIL
Have not done my 10,000 hours, but a couple of years at PSW, and moved from fishing with a single line to owner of a commercial trawler (metaphorically speaking). Now I fish with many lines. It is amazing when you go over the same information time and time again, eventually it clicks. Like planting trees; being the house, 20% sale items, selling into the excitement. and patience. I just sold an AAPL Jan 12 340/390 BCS financed by the sales of Jan 12 275 Put. The trade was put on one year ago for a net credit and exited five minutes ago for a 49 dollar per contract profit. No point in waiting till opex to see what happens, and I will just sell 10 of those VLO puts to make myself net the round 50.
I no longer worry about opex coming as I have adjusted well in time for most positions that go against me. I still make some howlers (RIMM, TBT, TRGT) but I play the percentages and my winners outdistance my losers by many miles.
I would never be in this position if it were not for Phil. He is a treasure, pure and simple. The goose that lays the golden egg if we care to listen and practice. Phil, a mighty big thank you.

Winston

The legendary Phil Davis has done it again with his call to "get out of the market now" (12/05/2017). Congratulations Phil, and while I am at it, I again would like to Thank You for your advise given me in March '09, when you said "unless you believe the world is coming to an end, then get in this market with both feet"...... and what a ride that was !

1234gel

Maya, After years of being pretty good at picking stocks I still managed to lose almost as much as I made.All the reading Phil asked us to do as a new member (And everything else I can get my hands on lately) has revealed my Achilles Heal.Good stock picks do not necessarily make money. My problem was swinging for the fences. Since becoming a member Jan 1 this year and getting into to scaling into small trades I am amazed at the steady profit growth I have experienced already while not worrying about getting killed. And having fun doing it.. Phil, Thanks for the education, the help you give and the chance to learn more and get better. Also thanks to all the members who have answered the few questions I had when your not around.

Ricpar

I am a Registered Nurse, so is my wife. We work hard to take care of seven kids that are the joy of our lives. The cost for a basic membership is ALOT from our our monthly budget of spending and saving…but well worth it! Phil has allowed me to really ramp up the savings we put away for our children's college funds and our retirement.

David

Phil, I have the SRS 2011 $7.50 short puts you recommended awhile back. I sold them for $2.20 and now $1.51 (up 31%) although SRS has been down since inception. This was a nice mellow way to play it like you said, thanks.

Jomptien

Phil thanks. You never cease to amaze me with your thoughtful perspective on a myriad of different issues and challenges. It's kind of an embarrassment of riches since I joined this board a few years back. The ride from Dow 9,000 or was it 8,000? up to Dow 15,000 seems hard to believe. I wish I could have it all over again, except with the capital I have now.

Winston

Phil – I think I finally figured out your "crystal ball" time frame. You're about 5-14 days AHEAD of what the market is going to do. It's taken me a long time to realize this, but boy it's been profitable. I go in when you recommend something at about 25% allocation, and then add to it each day it "goes the wrong way" Then BOOM, one day it's all good…. The long put list was literally exact in it's timing.

Burrben

Phil – Great calls yesterday, you were in top form. As I was reading your postings, I had hindsight of what the day brought. The calls were uncanny!

Jfawcett

Best day ever trading the futures, thanks to Phil's excellent call this am, and his "play the laggard" instruction. Well done Phil!

Deano

Fed days are fun! Just for grins I decided to see how much money I could make in two clicks. I bought DIA calls right when the surge started and then sold them the minute they hit my account. Net gain of 20% in 20 seconds. Can't do that very often…

MrMocha

I am struck by several things over the last few days. First is how level-headed we all are as Greece and China develop. Second is how very helpful it is to see the different trading styles we have, partly because of personal preference and partly because of different stages of development and education. It's very helpful. Well-done, Phil, to have developed this community.

Snow

Phil, you are the man. My positions in ABX and CLF are up massively this year, and doing very nicely with USO and UNG. TSR is another winner. Just waiting for the TSLA short now!

Rookie IRA Investor

Thanks, I managed to make 2k today so I am happy…and feel like I am finally getting it. New equipment and a quiet place to work helps a lot. I am happy for all the members that took your /NKD advice….that was fun I am sure! coke Take your vitamins…I don't know how you do all this! but, keep it up!

Coke

Great call on expe Phil! Went long 50 shares and sold for a nice profit! And Great call on the nkd shorts as well. I didn't use a stop that tight and was able to cover for a $400 gain. Works been keeping me pretty busy and I'm jealous of all the members who are able to check in here more often! It's almost always quite profitable! Looking forward to Vegas!

Jromeha

Phil- great call in oil this morning! Now that Im no longer studying and am back in the real world I can only check this in the morning, at lunch, and after work. Anyways, you've been killing it on oil ( even more than you usually do) so I made a point to wake up extra early and made .25 off your ‘buy oil if you're brave'recommendation. It's nice to wake up and scalp 100+ bucks before I even start my real job. You lay those golden eggs everyday Phil! I thank you for that!

Jromeha

PSW AC Conf: For those who may be on the bubble, I attended my first PSW LV in November. It was a real eye-opener. What I accomplished in a couple of days of exposure to Phil, Pharm, Craig, et al made my previous couple of years of hanging around the web site seem silly. If you are inclined in the slightest, you really should go. Just rubbing shoulders with other PSW members proved to be really valuable. Strictly on the basis of value, it's a great deal. You will have real time conversations with Phil and the gang and they will get to your questions and agenda items.

Mjjwo9b

I have followed along with your commentary and alerts and have been flabbergasted at your quick analytical skills and your journalistic skills to explain it clearly. In a little over three weeks I have cleared almost 1000.00 dollars and got an intensive education at the same time. I would like to immediately upgrade my membership.

TokyoLife

I cannot believe the success I have had in the last 6 months because of what I have learned here! It has been truly life changing. It's like the old adage about teaching someone how to fish instead of just giving them a fish. Thank you Phil, I am forever grateful and hope I have helped someone else along the way.

Craigsa620

Phil, i wanted to thank you again for helping me protect future stock allocations at work - finally, i feel like i am owning my own destiny with stocks vs. letting the market dictate what you get – thanks again.

Nramanuja

Thanks to Phil (again) for the lessons on the art of the roll, selling premium and hanging tight under fire (particularly in the first hour of trading-MADNESS). Watching you manage the $25KP has really helped my trading in a big way.

On Thursday, May 7, an unprecedented event took place: after a violent repricing in Eurodollar contracts as near as November 2020, for the first time ever the market was pricing in that negative interest rates are not only coming to the US, but would arrive sometime around the presidential election.

This move prompted a barrage of Fed speakers, including the Fed chair, to remind the public that the Fed really, really, really does not believe in negative rates (but never say never), even though one could say the same thing for the BOJ, the ECB and the SNB… and look at them now. In fact, in a world where growth is only possible with trillions in new debt injections – and with debt already at crushing levels, interest rates have to be as close to zero if not below it – the Fed has emerged as the "rational" outlier that refuses to take rates negative.

And yet, in a world where the economy was already sinking ahead of the catastrophic collapse spawned by the coronavirus, there is only so much the Fed can do before it took is dragged into the NIRP vortex.

To be sure, in many ways the market's expectation for negative rates is rational. As we pointed out overnight, even Goldman is concerned that the Fed is simply not doing enough QE to monetize the massive upcoming treasury flood let along stimulate a global reflationary wave, which leaves it with just one other option: negative rates. Nordea's Andreas Steno Larsen looked at this dynamic and reached a similar conclusion: "the Fed is still not buying enough to fully re-ignite the global credit cycle. We find that the Fed needs to buy a lot of bonds compared to issuance before USD scarcity is finally fully eased in the system, leading to easier financial conditions in EM and ultimately global growth prospects being repriced positively" In other words, "the Fed will have to buy more than currently. This speaks in favour of even LOWER long USD bond yields, not higher."

The market may also be taking hints from former Minneapolis Fed president, Narayana Kocherlakota who argued in an op-ed that the Fed should take interest rates below zero for the first time ever. To use his words, “unprecedented situations require unprecedented actions”.

On the other hand, there may simply be something in the Minneapolis water that makes local Fed president raving monetary lunatics (here we envision not only Kocherlakota but his successor, former Goldman banker and TARP author, Neel Kashkari), because while it is quite simple to extrapolate the catastrophic experience the Japanese and European financial sectors have had with NIRP to the US, the truth is that the Fed has rarely this unified in any view, and as former Fed staffer and current BofA rates strategist, Mark Cabana writes, "US negative rates are not an attractive monetary policy tool" and Powell was very clear in this view during his videoconference last Wednesday.

As an alternative to negative rates Chair Powell has indicated the Fed can ease through forward guidance, UST & agency MBS asset purchases, or "13-3" extraordinary market programs, although here again we run into the "huge problem" we observed yesterday facing the Fed, that the most likely alternative to NIRP would be a massive expansion in QE (one which Deutsche Bank calculated at over $3 trillion in more QE), yet such a dramatic move would also require – most likely – some sort of market event to give the Fed the cover to take Unlimited QE to a truly unprecedented level. It remains unclear how the Fed will square those two constraints.

And while Cabana expects Fed official to "overweight" the abovementioned tools in support of expansive fiscal policies "but not shift their thinking on negative interest rates in the near term." As an aside, for those who have missed the recent "Fed talk", below is a summary of the uniform and widespread opposition to negative rates from a range of Fed officials.

Of the above, the most striking rebuke of negative rates came from the October 2019 FOMC meeting minutes when "all participants judged that negative interest rates currently did not appear to be an attractive monetary policy tool in the United States". It is very unusual to see this type of broad based agreement on any potential policy stance, and as BofA concludes, "in order to see a material change in thinking on negative rates it would likely require a leadership change and large scale Fed turnover." While neither of these is likely in the near term, Trump recent endorsement of negative rates leaves open the door that the president may appoint an even more dovish Fed president in his second term (we are confident that Kashkari would be delighted to be considered for the post of the man who destroys the dollar as the world's reserve currency).

Operational hurdles: IOER Legality

To be sure, in addition to the Fed's own preference – which as events in the past two years have shown can change on a dime, especially once a "shock" triggers a violent market meltdown – there are countless operational hurdles, starting with the question of whether negative rates are even legal.

Consider, that in the Federal Reserve Act, it is specifically stated that banks can "receive" interest on reserves. There is no specification for banks paying interest or how negative rates could be implemented in this context.

In her 2016 Semiannual Monetary Policy Report to the House, former Fed Chair Yellen noted that the legality of negative rates "remains a question that we still would need to investigate more thoroughly." This question has not been definitively answered and it is not clear whether the Fed would actually charge negative interest or implement a fee for holding reserves. Indeed, the fact that the Fed has not ruled out negative rates suggests the Fed likely has adequate legal cover to implement such a regime. Furthermore, while just two months ago one would have argued that it is illegal for the Fed to buy corporate bonds, a quick meeting between Powell and Mnuchin which led to a bizarre joint venture between the Fed and the Treasury changed all that in the blink of an eye. In short, as Cabana writes, "if the Fed wanted to implement negative rates they could find a way to do so but could face pushback. We see this as an important but surmountable hurdle for the Fed to clear before implementing negative rates."

Treasury nominal coupons and bills: Treasury auction regulations via the "Uniform Offering Circular" state that nominal coupons & bills are permitted only to have a bid rate that is "a positive number or zero". This is striking since in August 2012 Treasury announced it was in the process of building the operational capabilities to allow for negative rate bidding in Treasury bill auctions. It is thus safe to assume that the Treasury has subsequently built the operational capacity to auction bills and nominal coupons with negative rate bidding but is unwilling to take this capacity live. It is unclear why Treasury might be reluctant to take this step but it could be (1) Treasury is worried about sending a signal about the economic or monetary policy outlook (2) there may be legal or accounting hurdles that need to be cleared up.

Treasury's inability to auction bills or nominal coupon securities with negative rates results in an inefficient primary issuance process when secondary market rates are negative. Treasury offers securities at par but bidders can then sell these securities into the secondary market at a premium. This essentially results in a subsidy to the primary dealer or Treasury bidder community that should be captured by the Treasury (we described this in "Here Is The Treasury's (Not So) Secret Trade Printing Millions In Guaranteed, Risk-Free Profits Every Day") . Treasury auction rules suggest that when a security is auctioned at par the bidders have their allocations determined on a proportional basis to their auction offers. This is why bid-to-covers spike when secondary market levels are below zero at auction.

TIPS & floating rate notes: Treasury rules state that among fixed rate debt only TIPS can have a negative bid rate. Treasury floating rate debt can be auctioned with a discount margin that may be positive, negative, or zero but there is a 0% minimum on interest accrual. Treasury rules ensure that an investor is never required to pay the US Treasury during a period of CPI deflation or during any future period in which bills might be auctioned at negative rates.

That said, just like the legality issue, BofA does not see Treasury auction limitations as a material constraint to adopting negative rates "since we assume operational hurdles can easily be overcome. However, allowing negative UST bidding for bills and nominal coupons is another important operational hurdle that will need to be addressed before negative rates can be more widely adopted."

Money Market Funds in a negative rate environment

Ass Cabana continues, a key concern around negative rates in the US is the viability of money market funds (MMFs). MMF AUM total $4.8tn with the vast majority in government funds. MMFs also play an important role in funding, making up ~25% of all cash lending in repo markets.

Negative rates are particularly problematic for stable NAV MMF. Recall, 2a-7 MMF reform requires institutional prime & municipal have floating NAV while government and retail prime + muni funds have $1 stable NAVs. Negative rates are an issue for stable NAV funds because the fund value will decline by virtue of investing in negative yielding assets. To address this NAV stability in a negative rate environment MMFs in the US would need to move to a floating NAV regime, potentially increase customer fees, or use a share cancellation regime. The latter two options as more likely given that changes in the stable NAV structure could potentially cause sudden changes in fund allocation as we saw during the 2016 MMF reform

Increased MMF customer fees or a share cancellation regime are more likely in a negative rate environment vs a shift to floating NAV for all funds. In a regime with higher MMF customer fees the stable $1 NAV could still be retained but the principal invested in the fund would gradually be reduced by the fees charges to compensate the fund for the negative yielding securities. In a share cancellation regime a MMF would retain the $1 stable NAV but gradually reduce the number of shares an investor is entitled to at redemption. For example, an investor that deposits $100 and receives 100 MMF shares in a -1% negative rate environment would see their shares gradually cancelled; 1Y later they would receive $99 in cash at redemption.

Depending on the implementation of negative rates in the US, MMFs may also face competition with deposits. If the Fed sets IOER negative this will immediately impact market rates, but may not be passed onto consumers. Banks may charge fees or other service costs in order to offset their negative IOER rate. This could prompt outflows from MMFs into deposits, which are often considered close alternatives. As a result, tetail MMF investors would be the most likely to shift to bank deposits given reluctance in the banking industry to charge negative deposit rates for retail consumers.

BofA's bottom line is that the US MMF industry would likely be able to adapt to a regime of negative yielding interest rates if given enough time to prepare. That said, MMFs and front end investors would likely need at least 6m to 1Y worth of notification from the Fed that negative rates should be prepared for so that they could properly adjust their systems. Ominously, Cabana says that his "sense is that several MMF are already preparing for the possibility of negative rates."

Other issues: systems & repo

The take home from the above, is that if the Fed were to take rates negative, Cabana is confident that it would need to provide ample lead time to the market to prepare financial systems for such a change. Market participants would also need to adjust trading, settlement, accounting, tax, and legal systems or procedures to prepare for negative rate trading. While some of these operational hurdles have already been cleared for large global firms given the periodic negative rate trading of US Treasuries and other developed market sovereign bonds, more time would be needed to prepare for domestically oriented firms. Furthermore, the Fed would likely prefer that firms focus their operational resources on preparing for the transition away from LIBOR rather than on negative rates, which may further limit the Fed's willingness to take rates negative in the near term.

One area where Cabana does have serious questions on the operational readiness for negative rates is in the repo market. This is not an issue for specific issue UST collateral, which has frequently traded at negative rates post UST fails charge in 2009, but rather is a question centered on the tri-party repo market where it is unclear if there is operational capacity for rates to trade at negative levels. Questions emerged given that in late March the 1st percentile of the SOFR rates traded in negative territory while the 1st percentile of tri-party general collateral repo rate (TGCR) remained at zero. This was the first time this segment of low-rate TGCR trades exceeded SOFR

If this is correct, and there are operational issues with taking tri-party GC repo into negative territory, then this is a material operational impediment, and as Cabana writes, "we cannot envision the Fed moving into negative territory until the tri-party repo market can easily follow suit."

Negative rates can hamper financial intermediation

The biggest problem, however, is that the scope of negative rates is ultimately limited. As a reminder, in a 2010 Federal Reserve memo, it was noted that setting IOER lower than about -35bps would likely cause banks to reduce their reserve holdings and hold currency instead. However, other central banks such as the SNB and ECB have taken rates more deeply negative, suggesting that -35bp is not a firm floor.

Meanwhile, as rates become negative there are also other behavioral shifts that could arise, according to BofA, which notes that if banks begin to charge depositors, it is possible that cash vault holdings would increase or that special banks could be formed to store physical currency. Consumers and businesses might also seek to pre-pay credit card, account payable, or tax bills in order to reduce their cash holdings. Similarly, those who are expecting payments from creditworthy entities might prefer to defer them while those receiving checks might wait longer periods before depositing them. It is unlikely that the Fed would find such behavioral shifts productive and might view them as an additional cost to negative interest rates.

On top of all that, negative rates would serve to impede key financial intermediation functions for banks, pensions, & insurers. As we have observed in Europe and Japan, negative interest rates would hurt bank profitability and potentially make them less willing lenders due to lower capital cushions.

Virtually every strategist has warned of significant downside to bank earnings in a negative rate environment and noted lower margins result in reduced capacity for a bank to absorb losses. Pensions & insurers would also struggle with larger liabilities to manage. Financial intermediation complications likely reduce the attractiveness of negative US rates for the Fed.

Aside from Bank of America's near universal panning of negative rates, JPMorgan's Nick Panigirtzoglou is similarly damning of what the financial system would look like if the Fed shifts to a negative rate.

Starting with the negative impacts first, JPMorgan's strategist has "little doubt" that US interbank markets and repo markets would suffer if the Fed cuts its policy rate to negative. Given money market funds are important participants in repo markets, overall repo market activity could decline. This is also because narrowing spreads in the repo market are likely to induce some lenders of collateral to pull back from the market, on the grounds that returns from securities lending are no longer adequate. That would impair bond market liquidity, by making it more difficult to cover short positions in repo.

Incentives to cover shorts are also reduced at zero rates, which can result in higher fail volumes than seen before, hampering liquidity and volumes even further. Finally, and echoing Cabana's concerns above, some US counterparties (mainly US real money investors) may not be able to trade repo at negative levels (operational, legal, economic reasons etc.) which will again likely reduce repo market volume/activity.

Separately, similar to what happened after the ECB depo rate cut in June 2014, mildly negative US rates coupled with a natural aversion to negative rates will likely reduce the incentive of healthier banks to trade with each other and increase their incentive to trade with less healthy banks including US subsidiaries of foreign banks. That is, even if US interbank market volumes decline, a greater portion of the interbank volume is likely to involve less healthy banks. Similarly a greater portion of US repo markets should involve higher yielding non-government collateral. That is, interbank markets, both unsecured and secured, will likely become less fragmented as it happened in the euro area post June 2014.

The search for yield will likely also spread from money markets to bond markets. As the US money market fund industry gets hurt, the main beneficiary would be US bond funds, i.e. investors would replace money funds with bond funds as savings vehicles. And as, following a Fed policy rate cut to negative, the short end of the US government bond market collapses towards zero, this would force bond investors towards higher maturity and lower-quality debt instruments.

Negative rates would also result in an even bigger bond bubble, as corporate and mortgage bonds would be the biggest beneficiaries of this intense search for yield given their relatively low risk weighting and given that banks with large reserve deposits at the Fed would likely face intense pressure to avoid the capital erosion from negative deposit rates.

While negative interest rates on deposits would incentivize banks to “get rid” of their excess deposits rather than suffer an erosion of capital, the amount of reserves in the system can only be reduced if the Fed starts reducing its bond holdings, something unthinkable in the current conjuncture. If a commercial bank makes a loan or buys a bond to avoid negative rates, they simply pass reserves on to another bank, which ultimately end up back at the Fed. As such, excess reserves would become something of a ‘hot potato’, with no bank wanting to hold lots of them at the end of the day. And this “hot potato” effect would be even more intense in the current backdrop of central bank balance sheet expansion and higher liquidity.

The likely damage to the profitability of banks and the risk that banks could actually increase lending rates to protect their interest rate margins. That is, assuming that banks will be reluctant to pass negative rates to retail or corporate depositors, they might increase lending rates to offset the decline in their profitability. Effectively, a decline in the deposit rate to negative could actually cause a tightening in financial conditions in the real economy and a contraction in bank lending rather than easing.

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Phil is a master at keeping you laughing, as well as making you money. - It is like " laughing all the way to the bank!"

Gel1

Greetings Phil,
I am an Economist at Harvard and some of my colleagues and I would like to let you know that we follow your posts on SA, and find your analysis refreshing, rigorous, and acute. Great work! Though many of us (including myself) have our work covered in the Wall St Journal, in many ways your macro commentary is more fearless and accurate than what is generally found in that venerable publication.
Kind regards,
Daniel

Daniel

That was a quick double on the DIA calls. trailing stop in place.

Kwan

WOW, glad I went bearish… Phil, thanks for the help on the QID calls yesterday, I turned it into a partial cover rolling down to the Feb 52s selling the 55s 1/2 covered. Sold 1/2 and now lowered my cost basis to $4.38 on the $52s (fully covered).

Texasmotion

1,000% on SKF - It was a freakin' monster into the center field bleachers! I saw it play out live and squawked it from the StockTwits ID which 14k people follow: Home run trade of the week @philstockworld just knocked cover off ball w $SKF puts. http://bit.ly/piBL Great trade bud!

Phil Pearlman - StockTwits

Blessings, ALL: So we have completed two months of 2015. So far it has been a good ride with my PSW all short put portfolio showing a 15.73% gain with $83K in profits harvested in 2015.

IHS4GOD

Simply the best blogger with the greatest group of members a person could surround himself with on trading day. I've been trading for quite some time now and the insights & suggestions offered by Phil and the members keep me on a continuous learning cycle.

DDay

PSW – Price/Value; The value of PSW on a regular basis exceeds by far the price of the annual subscription. The edition of February 26 'Which Way Wednesday – Popping or Topping?', – priceless for the serious investor.

Winston

I have to thank you for excelling yourself during this past week. I have spent a good few hours going over your notes and comments and there are so many gems on repairing and rolling trades that I have been beavering away on paying special attention to my major positions and analysing them using your approach on Tuesday. Being able to look at a group of trades on the same underlying (in this case AAPL) and taking a detached view by assessing the impact of the underlying reaching different price points was extremely reassuring.

Winston

I'd like to wish Phil and everyone else that contributes to this board a very Merry Christmas and happy New Year. The wealth of knowledge on here is incredible, and it has greatly contributed to my understanding of markets, politics, and the world in general. This year was when Phil's teachings all seemed to click in place, and my portfolio's performance shot up, and for that I am very grateful. Thank you!

Palotay

Your discussion during your web seminar on SPX and SDS today was great. It really let me see how you look at the numbers and use the 5% rule to see where inflection points occur and what the bands look like. This was incredibly helpful. I actually sold out of my small short position at a good profit ( which was more a bet on a short term fluctuation rather than a hedge after listening to you) and will look more deeply at my portfolio and how to hedge it. In addition your view on hedging was also very helpful looking at the leverage you can get w/ a small spread, and protect portfolio against a big move against me. Thank you for your sharing this. Very helpful.

Batman

Thanks for the USO mention, Phil, 140% on my USO lottery ticket in 12 hours, and no hesitation in taking the money and running — you have trained us well. Sometimes it's teaching, but with this kind of stuff, where you get whipped like a dog if you let 250% profit melt away, it's definitely training. Happy Fourth!!!

Zeroxzero

Thanks for all the work you put into this site. I have looked at a few other option advisory or "mentoring" services this year, but no one offers even a fraction of the content or the level of services you provide at PSW!

Jelutuck

Peter D, Just a note of thanks. Eight weeks ago, I entered my first RUT strangles, when the RUT was at 625. Tomorrow, I will let them expire, with the RUT at 625 (give or take). I didn't care when the RUT went to 650, nor when it dropped to 590. Easiest, no touch money I've made in a long time.

Judahbenhur

Phil, You were on the $ today with your calls almost exactly on the turns – Krap kuhn krup (Thai for thank you very much).

Jomptien

Boring trading – Phil/ Thanks to PSW, my yearly covered-writes are on pace for 15%. Add the long puts and well over 20%… and I look at it once a day and never lose sleep over it. Actually doing better than my trading account at this point (Thanks, summer 2013)
Anyway, the point is that anyone with enough money would be wise to do the 20% – 40% stuff and do trading as a hobby…

Arivera

Thank you Nantucket. It is hard to be a complete beginner in the market with this complicated, fast moving, and very advanced group. Phil is the Great One, but the membership is absolutely amazing! Had I known this ahead I would probably log in as "awe struck" everyday.

Coke

Phil… My portfolio, in the past few months, has acheived a high degree of stabilization. I've noticed that on up days, down days, even days, it doesn't matter, my portfolio rarely varies more than 2%. And over the long haul it just slowly increases in value. I attribute this not to investment choices, but to style. Thanks to you and others on this site I'm paying close attention to position size, delta neutrality, downside protection, and concentrating on selling premium rather than buying it. I've developed increasing patience, not having to trade daily, or even weekly. I'm concentrating on the finer points of trading, letting the profits come to me, rather than the other way around. I appreciate the help everyone here has given in getting me focused on this principle. I'm pumped!…in a calm sort of way.

Iflantheman

Well that was a fun day. Cashed out my GS 140 calls for about 35% profit and my AAPL calls for 38% gain. Not bad for 40 minutes of work. Back to 85% cash.

Singapore Steve

Phil I have been applying your arsenal (matresses, Edz plays, Ugl verticals etc.) to my gold holdings . So a big thank you for "teaching me how to fish" rather than just giving me the fish...

Magret

Phil, Passed a milestone today since joining 2 months ago. 25% of my account is in buy/writes, bull call spreads and disaster hedges. A majority of the trades were taken directly from your ideas or someone else`s contributions. Some were daytrades that became spreads.
That part of my account is up 30% as of today. I don`t worry about it, or mess with it much, did a few rolls etc.
Rest of the account is there to day trade, cover the writes and take advantage of opportunities.
Thanks to everyone who contributes here, what a sweet way to trade, so many opportunities.

Ben1Be

I have been here for 8 yrs, and find it the best service out there. There are more eyes on the market in this forum than anywhere, and opinions abound. So, relax, and let the group help you out.

Pharmboy

The legendary Phil Davis has done it again with his call to "get out of the market now" (12/05/2017). Congratulations Phil, and while I am at it, I again would like to Thank You for your advise given me in March '09, when you said "unless you believe the world is coming to an end, then get in this market with both feet"...... and what a ride that was !

1234gel

Happy holidays to all members of PSW. Just completed my 6th year and still my favorite site to read. Thank you all for your contributions and support especially you, Phil!

DClark41

Thanks Phil for all you do. I feel like I don't read all the newsprint because when I check in with you I know I get the "real" scoop. Your service is number Uno in my book for all the knowledge and teaching. I ignored the aapl spin and am now enjoying some rewards. Every AM I get my Phil fix and throughout the day any important links. Mucho gracias. It leaves me time for my volunteer work besides the investing.

Pirateinvestor

Phil-
I would like to echo the sentiments of dclark41. Joining this site was the best thing I have ever done to aid my growth as a trader/investor. There are so many smart and experienced people here sharing their ideas that regardless what your investing style is you will learn something daily. Thank you and all the regular contributors for your generosity.

Acd54

Thanks, after years of blood and blunders, I have reached a significant milestone – I don't lose money. Net net, I rarely have a losing week, market up, market down. And that I owe to you. Balanced positions. More premium sold than bought. Fundamental criteria applied to good companies, not momentum/ news headlines/ stock du jour/ triangle squeezies. But rather earnings, P/E, dividends, competitive position — the boring stuff that takes study, thought,….and patience. You have been a great teacher, and I have embarassed myself repeatedly day with how slowly I learn.
And it's a funny thing – if you don't lose, the gains start to pile up. The arithmetic is cruel to the downside, and becomes a gift in the other direction. And I'm in this for the long run, having made myself unemployable through a need for diversification. Moreover, what I've learned here has also elided into other areas, including real estate and ex-U.S. investment. Pretty cool. Have a great weekend.

Zeroxzero

Phil, I just wanted to say thanks for being there. The world needs more of you. Your site continues to positively change my life daily.

Chasw

Phil – In the event of a mkt meltdown, which of the indices, in your opinion do you think has the most potential for % move down. I'm looking at call options on SDS and the DXD. Any thoughts? Ideas?
Thanks .. and thanks for being a great teacher! I've learned so much in only a month!

Louis631

I have been around for many years now, was a modest inexperienced investor when I started, and I can honestly say I would not be at the point in my portfolio I am today without the guidance of Phil and JeanLuc and Yodi and all the others I've had the pleased of learning from and, on a few occasions meeting, over the years. Truly been a great experience.

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